Real Estate Investing - Property Flipping
Quick Equity Through Real Estate Flipping
Property Flipping refers to purchasing an investment property with the intention of selling it for a quick profit instead of holding it for natural equity appreciation.
How Real Estate Flipping is Done
In real estate investment, property flipping is the strategy of buying an investment property, and on-selling it within a short period of time (usually under 1 year) for a quick profit. It is usually done through 2 ways:
The first is a renovation and flip (reno-flip), where an investor buys an undervalued property, improve its valuation through simple cosmetic renovation or improvements, and reselling, usually for a profit.
The second is where real estate investors buy in a rapidly appreciating market and reselling with little or no improvements to the property. This is buying with a hope that it will appreciate.
Risks of Real Estate Flipping
Property Flipping is a quick, proven way to make quick equity (make quick money) in real estate investment, if and only if, done correctly with the right property, in the right property cycle.
It is very often easier said than done. Market conditions can change suddenly, and it has been proven to change rather unexpectedly in recent years.
When market conditions change, an investor can be left holding onto an investment property that will usually affect his / her subsequent property investment plans. Flipping requires more than a casual understanding of the property market in the suburbs and regions you are interested in. A really good, broad and in-depth understanding of supply and demand of the different types of properties in the area/s is critical to a successful flip strategy. Not all cheap properties are suitable for a successful flip.
Other Considerations When Flipping Properties
In the Australian property market, additional considerations have made property flipping a difficult property investment strategy:
High Entry Cost. You have to factor in property stamp duty (approx 5.5%, depending on state), legal, mortgage, building and pests inspections fees.
High Exit Cost. Real Estate Agency listing fees (approx 2%), sales conveyancing, property staging.
Capital Gains Tax (CGT). If CGT applies to you, up to 50% of your profit will be included into your annual tax returns. Have a chat with your accountant to understand how CGT applies in your circumstances.
Renovation Costs. You'll need to factor in the cost of actual renovating the property. Unless you are a hands-on handy-man, you will find that high labour cost often makes the renovation project non-viable.
Holding Costs. Many investors forgot to factor in holding costs. And as a result, they ended up making a loss in the reno-flip strategy. You'll need to include mortgage setup costs, mortgage interests, and any exit fees. Some lenders may claw back mortgage commissions from their brokers, when you close the mortgage within the first couple of years. When that happens, brokers may in turn, recover this lost commission from you, the property investor. A good mortgage broker or lending team is critical to getting this right.
While a successful property reno-flip is rare in Australia now, we've helped a few property investors manufacture equity from their property renovation strategy.
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